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Friday, 4 April 2014

Whose priorities matter when corporations donate large amounts of cash?

Yesterday Westpac Banking Corporation (ASX: WBC) announced that it was donating $100 million towards setting up an IT educational scholarship which addresses the lack of females in the IT industry [Edit: The focus of the foundation appears to be much more broad than the news reports originally suggested - I actually support much of what they are doing personally but my comments about the agency problem identified in this article still stand]. As you can see from the attached article, the press loves feel good stories like this and it is almost reputational suicide to publicly stand against a move.

However I am against the very concept of donations such as this. This is not because I am against donating to charity - indeed I support several charities and micro finance organisations including The Cancer Council, Kiva, Catholic Mission and the Fred Hollows Foundation. I think charitable donations are a great way to benefit society and save tax at the same time.

The role of corporations is to act in the best interests of their stakeholders
The board and management team of a corporation are charged with acting in the best interests of their stakeholders. Although some define the stakeholders quite narrowly - i.e. only shareholders - I have a more broad view and believe that corporations should act in the best interests of all of their stakeholders - i.e. shareholders, employees and customers.

Therefore, unless an action is in the best interests of the stakeholders of the company - i.e. the shareholders, employees or customers then it is not their role to donate this cash.

If we use the Westpac example above:

This is clearly not in the interests of shareholders

They are giving away a huge amount of money for no tangible benefit to shareholders

Corporations often argue a fluffy point about goodwill but this is not measurable and is fast forgotten

It should always be remembered that this is the shareholders money that is being given away

They are not acting in the interests of employees

Employees are not the ones getting the scholarships nor does the employee base benefit from these scholarships

They are not acting in the interest of customers

It is a really long bow to stretch to suggest that the promotion of education benefits customers

As a side note I actually found it incredibly difficult to argue against this setting up of this foundation because I admire so much of what it actually stands for and is trying to promote

Some people make the compelling argument that corporations are the only actors which can bring enough clout to an issue to make a difference. In the modern world they control the largest pools of capital and these pools of capital can be brought to bear in a way that makes a difference. Whilst this is true there is a massive agency problem that happens - in this world of limited resources and unlimited problems, who determines where the corporations donate their shareholders' cash.

Corporate donations further the interest of management teams...not shareholders
If you look at corporate donations and the charities they donate to - it is invariable the charity that the CEO or Chairman support. They have a project that they believe is worthwhile and they use their power as the head of a large organisation to further their owninterests. This is precisely what happened in the case of Gail Kelly and Westpac.

Gail Kelly is a passionate advocate for a more balanced corporate environment and the breaking down of traditional barriers which women face in male dominated industries. I have no problem with her having this view and I think it is a problem that needs to be addressed however when she uses the cash of shareholders who may have other priorities to further her own hobby horse that's when I have a problem.

For example - I am a shareholder in Westpac and I am a huge fan of micro-finance and the benefits that it can confer. I think a bank such as Westpac is ideally positioned to set up a micro-finance trust and they will have a better understanding of the risks associated with such a trust and make a real difference that way. I would prefer that Westpac donate their cash to this - I also think it would do more good in the world.

However, I do not control the cash at Westpac - even though a very tiny portion of that is mine. So I have to go along and effectively donate to a cause that I wouldn't normally support. Gail Kelly is effectively forcing shareholders in Westpac to donate to a cause that she wants to support and ignoring other causes that they may want to support.

Social priorities are better advanced by governments and individuals than by CEOs
Although it may be controversial I am going to suggest that corporate donations are akin to a tax on shareholders of that corporation. If we are going to pay a tax in order to advance social causes I would rather that this be done by the government than by the corporation - I can see the government's priorities and I play a part in voting that government in and out of power.

CEOs should not be allowed to use funds that are not theirs to further their own interests, however noble that interest may be. It creates agency problems and begs the question...whose interests is that CEO really looking after? From the outside it looks like it is purely their own.